pratt_8e_chapter_8_solns - CHAPTER 8 INVESTMENTS IN EQUITY...

This preview shows page 1 - 3 out of 37 pages.

CHAPTER 8 INVESTMENTS IN EQUITY SECURITIES BRIEF EXERCISES BE8–1 a. Comprehensive income includes all non-owner changes in shareholder equity that do not already appear on the income statement. For example, the change in value of assets that have been sold and in certain assets that have not been sold appear as comprehensive income, but net income only includes the changes in assets that have been sold. b. The investments are considered Available-for-Sale Securities, because the Unrealized Gains/Losses are not posted to the Income Statement; instead, as shown in the disclosure the Unrealized Gains/Losses are carried directly to Stockholders’ Equity through Comprehensive Income. In 2006 the Available-for-Sale Securities increased $26 million in market value. In 2007 the Available-for-Sale Securities increased $58 million in market value. In 2008 the Available-for-Sale Securities dropped $80.5 million in market value. In each of the three years, Merck did not sell the securities at the year-end value. (An Unrealized Gain/Loss is a holding gain/loss, meaning the securities were not sold but simply marked to the current market value.) BE8–2 Bristol-Myers Squibb designated its Marketable Securities as Available-for-Sale Securities and as such reflected holding gains/losses (unrealized) in Comprehensive Income, not on the Income Statement. The $37 million reflected a change in the market value of the Securities which were still owned by the company. The asset section of the balance sheet will also show the change, with the carrying value of the Securities adjusted by the $37 million. BE8–3 a. Investment in Equity Securities (+A) 374 Equity in net income of affiliates (R, +SE) 374 b. The equity in net income of affiliates does not represent a receipt of cash from the affiliates, but it does represent an increase in net income. To reconcile the net income with the receipt of cash (on the Statement of Cash Flow, Indirect Method), it is necessary to 1) back out the net income from affiliates and 2) add in the cash dividends received from the affiliates. c. In Pepsi’s case, in 2008 the company only received cash of $172 million ($374 - $202); in 2007 and 2006, the company received $119 and $111, respectively. d. Company management would evaluate the affiliate investments in two key areas: the effect on Pepsi’s profitiability and the effect on Pepsi’s cash flow. As the numbers above attest, the investments are contributing increasing amounts to cash flow, but the contribution to 2008 profits was lower than prior years. BE8–4 1
Goodwill is the amount paid above fair value when assets are acquired. P & G, in its business growth strategy, has acquired other companies and has paid, collectively, $56.5 billion above the fair value of the assets acquired. BE8–5 Assets (+A) 1,323 Goodwill (+A) 1,800 Liabilities(+L) 323 Cash(-A) 2,800 Goodwill is an intangible asset that represents the excess above fair value paid for assets acquired. J & J paid $2.8 billion in cash and assumed liabilities. Balancing the journal entry, the company acquired assets with a fair value of $1.323 billion. Assets and liabilities increased by $323 million with no change to equity.

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture